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Regime switching in a new Keynesian Phillips Curve with non-zero steady-state inflation Rate

Gbaguidi, David Sedo (2011): Regime switching in a new Keynesian Phillips Curve with non-zero steady-state inflation Rate.

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Abstract

The main topic of this paper is to challenge the rational nature of the agents' expectations and the structural effectiveness of the behaviorally micro-based New Keynesian Phillips Curve (NKPC). Building on previous results, we model this trade-off between the U.S inflation rate and a Unit Labor Cost-based measure of the real activity through a Markov Switching Intercept and Heteroscedastic - Vectorial AutoRegressive (MSIH-VAR) specification. This specification allows the adequate capture of the rationality in the agents' expectations process. It underlies a finite number of expected inflation rate regimes, which highlight the agents' adaptive beliefs on the achievements of these regimes. Moreover, the results confirm the structural stability of the NKPC over the inflation rate regimes as its deep parameters seem to be unaffected by the regimes switching.

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